Impact Investing Will Make a Difference
There is much debate as to whether corporate social responsibility and environmental conscientiousness are beneficial to the financial bottom line. Yet for all the talk about brand loyalty and measuring expenses versus sales, there is one potential benefit to CSR that is often overlooked — strategic investments.
There is an entire industry emerging, variously called socially conscious investing or impact investing that supports businesses that not only meet financial objectives, but social or environmental objectives as well.
“While many will argue over definitional nuances of what impact investing is, it is fair to say that its transformational potential rests on the focused and deliberate granting of access to capital to neglected segments of the economy or population in order to generate both a measurable social impact and a financial return,” wrote Ian Potter, a distinguished fellow at the online business school INSEAD.
Last year, some $8 billion was committed to this triple bottom-line approach to investing. While that is only a tiny drop in the overall investment bucket ($18.6 trillion as of last year), the number is expected to grow to $9 billion this year, representing a 13 percent increase.
One reason for the increase: it’s a good investment. According to a survey conducted by JP Morgan, 89 percent of the investors who participated “report that their impact portfolio performance is meeting or exceeding social, environmental, and financial expectations.”
Who are these investors and what are the factors driving the growth of this type of investments? Indications are that they are largely younger investors. And over the next 40 years, Generation X-ers (born between 1965-80) and Millennials (born after 1980) stand to inherit some $41 trillion. This is an enormous transfer of wealth to those who appear to value social and environmental well-being on a par with financial returns, and thus stand to be a potential force for change.
This same group is also perhaps the best informed generation yet, at least if access to the Internet means anything. Increased awareness of the multiple issues facing our society is likely to influence their decisions.
But it’s not just the young and idealistic who are interested. Prominent families and private foundations are partnering with investment banks to develop impact investments that align with their social missions.
Impact investing is still very much in its formative stage. The World Economic Forum reported last month that 66 percent of all financial advisors claim to be unaware of the existence of impact investing. What criteria will determine which companies are considered favorable and how exactly will this performance be measured? It’s not as simple as looking at just financial parameters.
Several guidelines exist already, including IRIS, a catalog of over 400 standards developed by the non-profit Global Impact investing Network (GIIN), and implemented by GIIRS (the Global Impact Investing Ratings System), which was developed by a subsidiary of B Lab, a non-profit organization dedicated to using the power of business to solve environmental and social problems.
IRIS Version 3.0 was just released for public comment. It contains operational definitions for numerous impact terms. This common language forms the basis for a GIIRS assessment. GIIRS ratings can be considered analogous to Morningstar ratings of mutual funds, except that they assess the social and environmental impacts of the companies they review. The ratings are voluntary and are generally pursued by companies that feel they have a positive story to tell. The rating consists of five sub-categories: governance, workers, community, and socially and environmentally focused business models. These standards provide guidance to those looking to invest in businesses that are having a positive impact on the world.
According to the GIIN, “The impact investing industry has the potential to steer significant sums of money to market-based solutions to the world’s most pressing challenges, including sustainable agriculture, affordable housing, affordable and accessible healthcare, clean technology, and financial services for the poor.”
But this movement is being hampered by weak market mechanisms that have not yet won the confidence of mainstream investors. INSEAD’s Potter claims it’s the absence of “credible and viable fund managers.” Startups are still tweaking their business models and established fund managers are just beginning to wade in. When the large and generally conservative institutional investors, such as pension funds, get on board, this movement will probably take off.
Meanwhile, small investors already have the option of choosing from a number of mutual funds that invest specifically in companies that meet the criteria of socially responsible investing (SRI). Some popular choices are iShares MSCI USA ESG Select Index (KLD), Calvert Equity Fund (CSIEX), Domini Social Equity (DSEFX), TIAA-CREF Social Choice Equity Fund (TICRX), and Parnassus Fund (PARNX), all of which were recommended by Kiplingers. Others include the Appleseed Fund (APPLX), Amana Trust Income (AMANX), and Walden Social Equity (WSEFX).
Each fund has its own emphasis. There is wide divergence among these as to which companies should be included as there is no absolute definition of social good. Tobacco, alcohol, defense, and nuclear power are some examples of business activities that could eliminate a company from some funds, but not necessarily all. Apple is an example of a company that some funds avoid due to its labor practices overseas. Some sought-after companies that tend to score well in these assessments provide social services and are expanding access to education, better healthcare, and decent housing for the poor on a global basis.
So when will these social and environmental concerns actually rise to the same level of priority as financial return for most company managers? Recent experience suggests that those days could still be a long way off. As Green & Clean Journal noted on Wednesday, “When CSR battles the bottom line, the bottom line (still) wins.”
But those tables are slowly turning, as awareness grows of the interconnected nature of businesses and the rest of the world. Plus, there are many cases in which it’s not an either-or proposition. Becoming more efficient, avoiding waste, attracting thoughtful employees (and customers), gaining the trust of the public, and being seen as having a sense of purpose in your business are all factors that are both sustainable and good for any company’s bottom line.
A World Economic Forum report offers several recommendations for how the impact investment sector can reach scale. Among them are: “calling on impact investment funds to be transparent about the financial returns that are generated; for impact enterprises to proactively measure and report on social and environmental impact; for governments to provide tax relief for early-stage investments in which public benefit is created; and for philanthropic endowments to commit their investment capital to impact investments and not just to programmatic allocations.”